“Why the leadership industry rules”
Doctors are often accused of not being good business men or leaders. The good news? That sentiment is often based on a faulty view of an effective leader. We now know, effective leadership is doing little things right, every day. Process Leadership yields greater results then a “Rock Star” CEO ever will. Process Leadership is a learnable skill that requires attention to detail and consistency which are traits where doctors excel.

Healthcare consolidation is an inevitable consequence of the current medical environment. As a doctor, it is essential to know the value of your practice and how to position that value when considering the merger or sale of your practice. We advise our clients, at a minimum, to consider the following items in a merger: Does the level of care of the group you are considering match your level of care for your patients? What are the future plans of the group? Growth or sale?, What is the management structure of the group? What benefits does the group bring for the individual practitioner? Are there considerations for group ownership in profit centers such as surgery centers or real estate? Yes, while the medical industry is trending towards consolidation, always take a thoughtful approach with the right advisors.

eSight eyewear is super impressive! It’s a computerized video magnifier that is worn like a pair of glasses and allows adults and children with low vision to clearly see the world around them. Read here for more details — What an amazing discovery!

Physicians learn from each other, and medical crowdsourcing is another resource for doctors to identify and troubleshoot complicated issues. Collective wisdom from diverse countries and specialties can be a great tool. Check out this article to learn more.

Amid a recent discussion with an office manager (we’ll call her “Karen”), she recently renegotiated the commercial lease for her doctor’s office. Karen proudly shared that she had negotiated a very good deal. However, our exploration of the terms revealed quite a different story.

Apparently the landlord’s broker (“Mike”) offered Karen a discount on her current rental rate, if she agreed to renew the lease on the spot. This office is about 2,000 square feet and while tidy, its cosmetic aesthetic is dated. The physician (whom we shall call Dr. Alex) had been operating from that location for several years, and had great credit. When Mike stopped in, it was the first time Karen had been offered a rental discount. She was ecstatic!

Now, let’s look at the facts.

Dr. Alex signed his last lease 5 years ago. Assuming the previous lease was not signed at an above market rate, current rates for his neighborhood are down more than 25% from the last time the lease was inked. In addition, commercial vacancy rates are up significantly throughout the vicinity. Let’s look at the numbers. Karen’s landlord (“George”) offered her a 10% decrease in her rent over a 10-year term. The current rate was $25/sf, meaning a decrease to $22.50/sf.

Good deal, huh?

Actually, not so much. One of the many issues with this “deal” is that comparable rates for the market are not $22.50: They are $18 to $19. Because Karen didn’t have an understanding of those factors, Dr. Alex’s office will suffer the following losses over the next decade:

Loss in rent: $86K

Loss in free rent (typically given to tenants as a bonus to sign): $22.5K

Loss in Tenant Improvement (TI) Allowance (typically paid as an incentive by the landlord to update the space or equipment): $30K

Total loss compared to actual year 2014 market conditions: $138.5K

Ouch!

It actually gets worse. This real estate transaction could have been easily avoided had they explored current market conditions. And there are additional factors that can alter the equation. In our experience, over the past 5 years, we have seen doctors in similar circumstances save:

10% off market rental rates

up to 25% in free rent over current market offers

up to 75% in Tenant Improvement Allowance (TI) over current market offers

Reworking the numbers using the minimum benefit typically seen for a successful dental practice, Dr. Alex’s estimated loss is $229K. That’s an awful lot of money for any doctor to give away. Sadly, his situation is not uncommon. Over 10 years, he could have brought in $22.9K of additional profit. With average production numbers, that $22.9K could have translated into double profit growth each year. You have put decades of schooling and countless working hours to make your business successful. How can you stop giving away the money that should be going toward your business?

“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” —William Arthur Ward

It’s that time of year again. At 6 p.m. on a Thursday in January, you dutifully look over the Profit & Loss statement your office manager placed on your desk earlier in the day.

Sales are good, up 10% over last year (plus $50K). Labor is decent, with some overtime, but nothing egregious, considering the increase in sales (minus $15K). Supplies and other expenses are up, but correspond nicely with the bottom line (minus $10K). And rent expenses have escalated 5% over last year, which equates to a .5% increase as a percentage of sales (minus $3K).

Rental expenses. You begin to reflect on the looming lease negotiation with your landlord. Hopefully, all will go down without a hitch and you won’t take a major hit with a substantial increase. Yes, it was a good year, with sales up 10%, profits up $22,000 and the potential to bring in that new associate as your business grows. But there’s always the sense that this one element of your business is out of your control.

lease·hold (noun): the holding of property by lease. “A form of leasehold.”

It’s called leasehold. Real estate gurus will tell you that this is the vehicle of choice for building wealth in real estate. But as a doctor, your primary focus has never been about building wealth in real estate. Perhaps to you, a leasehold simply represents the brick & mortar that encases your dreams, ambitions and your life’s work.

Real estate is an essential component of your business, but it also adds substantial costs to your bottom line. Indeed, real estate can make or break a practice’s profitability. Accountants classify this as a “fixed” cost—one that cannot be affected by a change in operations. For a doctor, it is probably best regarded as a strategic cost. In other words, if your primary business is Medicine, your real estate should complement and help facilitate your success. That means that price is by no means the only factor. Whether you lease or purchase, it has a lot to do with location, signage, lease rate, visibility, demographics, competition and complementary uses.

real estate: (noun) 1. property consisting of buildings and land.

Real estate. We live, work, shop and vacation in it. Most of us have a basic knowledge of real estate. How difficult can it be? Two parties, one document, one space… But then again, real estate is typically among the top three expenses for a doctor. Most other expenses in a practice can be improved methodically over time, either through better scheduling or control of inventory. But your property is different. Real estate lease rates & terms are only adjustable once every several years.

Real estate lease expenses represent a contractual line item on your P&L and require no oversight or management—but because it is a contractual expense, you most likely have escalations built into your lease. Unchecked, your real estate costs will steadily and inexorably increase over time. Although the economy is showing signs of improvement, we remain in a tenant’s market. It’s common today that a correctly negotiated lease can decrease a doctor’s total real estate expense by more than 30%, resulting in cost savings exceeding $300,000.

Amazing, right? Unfortunately, many fail to take advantage of these savings.

“An expert is a person who has made all the mistakes that can be made in a very narrow field.” —Niels Bohr, Danish physicist and Nobel Prize winner

As industry experts know, real estate is both a science and an art. The attrition rate for commercial brokers entering the business is more than 70%. Of the remaining 30%, only 10% are considered successful by industry standards. Real estate brokerage has long been considered a commodity by consumers and even governing boards. Historically, the populist take is that real estate has a fixed value, and a broker simply facilitates the transaction.

This couldn’t be further from the truth—especially in commercial real estate. As illustrated in our scenario, there are multiple points of negotiation in any transaction. Many of them don’t even come up amid negotiations unless a broker is a true expert in a particular type of transaction.

It certainly requires tried-and-true knowledge, strategy and expertise to be successful. A broker needs to be an expert in real estate types and values, local market conditions, specific industries, negotiating, and in collaborating with other industry experts. True real estate expertise means having an understanding of multiple factors and then utilizing that knowledge strategically in favor of the client. It’s easy enough to find a broker who will merely facilitate a transaction for you with a “suitable” result. But search out that 10% broker. He or she is the individual that will bring you the expertise to get a fiduciary result—not just a satisfactory result.

I offer the following guidelines to help you choose the right firm and broker to represent your interests:

Find a Tenant/Buyer representation firm and/or require a strict buyer agency agreement. A number of reputable firms are available locally and nationally. If a broker represents even one property, it is a conflict of interest.

Find a company that has, at a minimum, training and best practices in place in the following areas:

Commercial real estate expertise: This should include standards for the most favorable time to negotiate a lease. If you are too close to the end of your lease, the Landlord has the advantage. If you are too far from the end of your lease, you could end up carrying double rents or out-of-market rents (or TI’s).

Negotiation strategies and training for all brokers: Does the company hire people that can withstand intense negotiations? A broker needs to be able to put the needs of the client above his own need for approval.

In-depth market knowledge: Does the brokerage have in-house training so that brokers understand complementary and competing uses in the dental industry? Do the brokers understand the inherent hazards of overbuilding an area? Does the brokerage have tools and research to support their brokers in determining the best locations?

In-depth medical real estate knowledge: Does the broker or firm provide medical- and dental-specific real estate training? Often the strength of a medical tenant can add up to several thousands of dollars in a negotiation.